An expert panel has recommended the federal equalization program be increased by nearly $900 million annually, by including at least some natural resource revenues in the way the historic program is calculated. 

Appointed by the former Liberal government, the panel has been studying ways to revamp the $10.9-billion program that pays money to have-not provinces. 

Its report comes in the midst of an unexpectedly fierce political fight over the program. Premiers from some of the wealthier provinces like Ontario, Alberta and British Columbia fear a too-enriched equalization scheme could eat into their tax base and tie Ottawa's hand.

In an attempt at compromise, the panel says 50 per cent of provincial resource revenues should be used in the formula to determine each province's real fiscal capacity. If that is done it will boost the program by $887 million annually.

"The exclusion of resource revenue is not viable … for the program to be effective in achieving its objectives," said panel chair Al O'Brien, a former deputy treasurer of Alberta, at a news conference following the report's release on Monday.

A number of provinces oppose including non-renewable resources in the funding formula, arguing that money from these resources is not sustainable. Alberta Premier Ralph Klein has even threatened to pull his oil-rich province out of the program if resources are included.

Equalization distinctly 'Canadian'

One of several large federal transfers to the provinces, equalization is a formula used by Ottawa to make sure smaller provinces can provide roughly the same levels of services as the wealthier ones.

"Equalization reflects a distinctly Canadian commitment to fairness. It has been described as the glue that holds our federation together," said the report.

"It means that whether you live in Newfoundland and Labrador or British Columbia, you should have reasonably similar opportunities to get a good education, to access health care, social services and justice systems."

It is in the interest of all Canadians to get this equalization program back to a "principle-based, formula-driven approach," said O'Brien.

Currently, Ottawa calculates the median on which to base equalization by averaging the revenue-raising capacity of five provinces: Quebec, Ontario, Manitoba, Saskatchewan and British Columbia.

Any provinces that fall below that standard receives equalization. As it stands, all provinces except Ontario, Alberta and Saskatchewan come in below the standard.

Leaving Alberta and its massive oil revenues out of the calculation has kept equalization artificially low, some premiers have argued. Including all resource income, however, might have added as much as $3 billion more to the program, others feared — and this would have tied Ottawa's hands when it comes to other spending.

For its part, the panel has recommended the formula be changed to a 10-province standard. But it seeks to moderate the cost of the expansion by suggesting only 50 per cent of resource revenues be used in the calculation.

Act now on report: NDP

During the recent federal election campaign, the Conservatives pledged to remove non-renewable resource revenue from the equalization formula.

But last week at a meeting of western premiers, Prime Minister Stephen Harper said he was willing to read the expert panel's report before making a decision.

NDP critic Judy Wasylycia-Leis said the recommendations are "an important compromise" and called on the federal government to act quickly.

"It's time to roll up our sleeves and act on this business," she said.

The former Liberal government set up the expert panel following a meeting of provincial premiers and territorial leaders in late 2004.